When it comes to financial analysis, it’s not the math, and it’s not the process, it’s separating the relevant from the irrelevant that gives me heartburn. For sure, there’s more numerical data than we need. And especially when it comes to ratios and various derivatives it can easily make your (I mean my) eyes glaze over. This is one of the reasons I like Saul’s approach. Of course it’s fallible and of course it’s not everything - but given the amount of numerical data I believe that he suggests the most informative things to look at are earnings and price. In my opinion, Saul’s investing strategy is far more complex and subtle than looking at two financial indicators. He obviously employs techniques which are not quantitative and quite possible defy description. I think intuition plays a larger role than even Saul is able to define.
As BrittleRock so nicely put it, there’s a question of intuition here, and I recently started looking a Cognex again (CGNX). It’s a MF SA rec from 2011 but I was in it before that and then out again. Here’s the story. They are probably the leader in machine vision, making elegant and very exacting systems. Can’t miss, right? A company of the future. Re-recommended late last spring.
Here are Revenues
2012: xx xx 80 82 =
2013: 82 86 91 96 = 353
2014: 91 109 169 117 = 486
A slow and steady grower until 3rd quarter of 2014.
Here are earnings:
2012: 20 24 21 20 = 85
2013: 21 21 25 25 = 92
2014: 24 32 59 33 = 148
Same thing. Practically stationary in 2012 and 2013, and then the big bulge in third quarter of 2014. So what happened? They got a huge $60 million order from a mystery customer that turned out to be Apple. But it’s a one time deal. They shipped it out. There’s no service contract, or currently any repeat business. Take that $60 million out of the third quarter, and you have $109 million, flat with the quarter before. Even with that big bulge, earnings were $1.48, and with a price of $50, they have a PE of 34. Their revenue and earnings will probably be close to flat, if not down, this year, without the $60 million order, unless they get some other large orders (which may possibly be in the works but…
Here are some clippings from the last conference call:
For the Mar quarter, we expect revenue of between $108 million and $111 million. This range represents growth of 19% to 22% year-on-year, even with an expected unfavorable forex impact from a stronger U.S. dollar. Gross margin is expected to be in the mid-70% range. Operating expenses are expected to increase by up to 6% from Q4. (We’re gearing the organization for a higher level of revenue expected in subsequent quarters. In addition, we see an increase in stock option expense and incremental fees related to our patent lawsuits against Microscan). The effective tax rate is expected to be 19%, excluding discrete tax items.
We do have some large customer opportunities that we’re looking to execute on and that we think can bring substantial revenues to the business in subsequent quarters. And in addition to that, we are bringing a lot of important new products to market, and obviously, investing in getting those out of the door and the sales force supplied with them as part of what we need to do to sustain significant growth we see in factory automation. And I’ll just go back to what I said earlier about large opportunities. I think we see those coming both in consumer electronics, but also in logistics and gearing up our organization to support those are expenses we’re taking now and we expect to see significant revenue come in future quarters.
Overall, we expect revenue to grow faster than expenses over the year, but not in the first quarter as I told you in the guidance. Clearly, we expect to see revenue grow as we move through the year. Traditionally, the first quarter is the lowest revenue quarter at Cognex and we expect that to be the case this year as well. So, revenue growing faster than expenses, gross margins in the mid-70s, I think that can kind of give you a sense of where we expect things to land as the year goes forward. There’s going to be headwind from currency obviously and I think it’s too early to speculate about the big order volume or timing of big orders in logistics and electronics.
As we look across our markets, we see growth in almost every market that we serve, with the exception of semi.
My thoughts: It all sounds good BUT:
I don’t see ANY recurring income. Even with the big $60 million sale to Apple, it’s been here and gone, and there’s no follow-on revenue.
They pay out an ENORMOUS amount of stock options, and then buy back stock with stockholder money to keep the stock count stable.
They may get more big orders but even if they do, it’s real short term. Each will ship in a quarter or so, and then it’s find another.
They don’t sell usually to end customers, but to OEM’s who package their stuff into automation systems. Often the end user companies don’t even know it’s Cognex equipment. Has never heard of Cognex. There’s no brand recognition.
They are at a 34 PE due to enthusiasm about the Apple order but that’s already gone. “What can you do for me today?” as the expression goes. Without another big order, I’d think earnings will be flat to down.
Anybody into this stock and have opinions? I’d love to hear them.
Saul
